The recent market selloff triggered by the emergence of DeepSeek, a purportedly low-cost, open-source AI model from China, presents a compelling buying opportunity, particularly for income investors. While the initial market reaction was driven by fear and a misunderstanding of the implications of DeepSeek, a deeper analysis reveals that the selloff was largely unwarranted and has created an opportune moment to invest in the AI sector. Closed-end funds (CEFs) focusing on technology, such as the BlackRock Science and Technology Trust (BST) and the BlackRock Science and Technology Term Trust (BSTZ), offer an advantageous entry point for income investors seeking exposure to this rapidly evolving space.
The rationale behind the market’s negative reaction to DeepSeek stemmed from the assumption that a free, open-source AI model would undermine the business models of established AI companies like OpenAI and consequently impact the valuations of companies like Nvidia, Microsoft, and Alphabet. However, this logic overlooks the fundamental dynamics of the AI market. Rather than cannibalizing existing demand, DeepSeek and similar open-source models are more likely to stimulate broader adoption of AI technologies. Increased accessibility and lower barriers to entry will likely fuel greater demand for AI applications, which in turn, drives the need for the underlying hardware infrastructure, primarily provided by companies like Nvidia. Therefore, the selloff of Nvidia, the leading producer of AI chips, appears illogical and presents a buying opportunity.
The attractiveness of investing in AI through CEFs like BST and BSTZ is further amplified by their current discounts to net asset value (NAV). Following the selloff, both funds are trading at unusually wide discounts, offering investors the chance to acquire a portfolio of leading tech stocks, including Nvidia, at a marked-down price. BST, which focuses on large-cap tech companies, currently trades at a 5.4% discount, while BSTZ, which includes smaller companies and private equity firms in addition to large caps, offers a more substantial discount of 10.2%. These discounts essentially provide a double discount: a discount on the underlying holdings due to the market selloff and a discount on the fund itself.
The combination of attractive valuations and high dividend yields makes BST and BSTZ particularly appealing to income investors. BST boasts an 8% yield, while BSTZ offers a more impressive 12.7% yield. By investing in these funds, income investors can capitalize on the market’s overreaction to DeepSeek, secure high dividend income, and benefit from the anticipated rebound in the AI sector. Historical precedent supports this strategy. A similar selloff in July 2024, driven by fears of US government restrictions on chip sales to China, provided a profitable buying opportunity for those who invested in tech stocks during the dip.
The current situation mirrors the July 2024 scenario, presenting a compelling case for a “delayed reaction” strategy. Just as the market eventually recovered from the previous selloff and tech stocks outperformed the broader market, a similar rebound is anticipated following the DeepSeek-induced dip. By investing in BST and BSTZ at their current discounted prices, income investors can position themselves to capitalize on this anticipated recovery while collecting substantial dividend income. This approach offers a compelling combination of income generation and potential capital appreciation.
In conclusion, the market’s reaction to DeepSeek was an overcorrection driven by fear and a misunderstanding of the dynamics of the AI market. The selloff presents a prime buying opportunity, especially for income investors. CEFs like BST and BSTZ offer an advantageous route to access the AI sector, providing exposure to leading tech companies at discounted prices and high dividend yields. By adopting a “delayed reaction” strategy and investing in these funds, income investors can benefit from the anticipated market recovery, generate substantial income, and diversify their portfolios. This approach allows investors to capitalize on the market’s short-term volatility and position themselves for long-term gains in a sector poised for significant growth.
